Emerging lessons on designing small business tax regimes in the region

1. Emerging lessons on designing small business tax regimes in the region Michael Engelschalk and Jan Loeprick Investment Climate Advisory Services World Bank Group

2. Summary of key issues for the design of presumptive regimes • How simple is simple enough? When are we trying to be too simple? • What is “small”? – and should we differentiate “micro” • Alignment is key! • Including corporates?! • Avoiding/curbing abuses • Who administers – central, regional, local? • Aligning accounting requirements • Implementation and Outreach – linking costs and benefits of compliance

3. Example – exacerbating compliance costs for small businesses in Georgia Significant improvements since 2005, but not for small firms

4. Example - How simple is simple enough? Indicators in Bulgaria • Bulgaria • Annual license tax - In 2005, the schedule had over 900 different rates, differentiated according to location and with more than 100 different kinds of services:

5. Example – Misalignment in Kazakhstan

6. Example - The pitfall of simplicity – The side effects of patent regimes (Kyrgyz Republic) • A strong disincentive for graduation (and possibly formal growth) as patent payments are determined irrespective of the turnover of the individual businesses • The patent system opens the door for abuses • The SRS only collects information on patent contribution and not on the number of taxpayers registered under the patent scheme → impedes the monitoring of migration in and out of the patent regime

7. Lessons learned during the conference?! • Success or failure of special (presumptive) regimes depends as much on administration as on the design of the regime • There is a lot of abuse of simplified regimes – design of regimes needs to be combined with the development of tools to control and counteract abuse schemes • Outreach to the general public on the importance and benefits of tax compliance should not be underestimated/ be a part of revenue administration objectives (?) • Technology offers a wide range of opportunities to reach and support as well as monitor MSMEs

8. Lessons learned cont’d • There is a large variety of presumptive regimes and there is often little scientific backing (legislative involvement/lobbying) of specific rates/approaches • Information and informational visits (without associated penalties) are often more effective than solely enforcement based approaches • Cash registers are becoming the norm for the small taxpayer segment • A differentiation of subsistence activities (at the micro level) is gaining support • Involvement of local governments in the administration of micro regimes… • ….and Involvement of the private sector in regime design!